Capital Gains Tax in UK: What You Must Know!

The tax system applies Capital Gain Tax (CGT) to profits generated from asset value appreciation before selling. Capital Gains Tax in UK applies to owners of physical properties together with traders of stocks and businesses that operate in the country, comprising all the assets owned by the person. Tax laws only impose charges on the amount of capital gain from sales yet they do not consider the final purchase price. 

Understanding the Capital Gain Tax (CGT) serves an essential role in financial planning because failing to grasp its rules might lead to unwanted tax bills with accompanying penalties. Property investors must regularly check the updated CGT regulations from the UK government because there are new rates and exceptions for 2025-26.

What is Capital Gains Tax and Who Needs to Pay?

A tax on Capital Gains occurs when you sell assets and obtain a value greater than their initial purchase price. 

It applies to: 

• The groups that are subjected to Capital Gains Tax in UK include personal individuals and business entities with trust structures.
• British residents who sell their assets from anywhere within the UK territory.
• Non-residents, have to follow a specific set of rules when they earn gains from their property located in the UK. 

Who is Exempted from Capital Gains Tax in UK?

• Primary residence will not incur Capital Gains Tax when Private Residence Relief conditions are satisfied.
• Investments that are held under Individual Savings Accounts (ISA), Pensions, and UK Government Bonds (Gilts).
• If a person gifts to their spouses or civil partners, then that is also exempted from CGT.
• Gifts to charities are also exempted from Capital Gains Tax.

The UK population of Capital Gains Tax payers totaled up to 348,000 individuals together with 21,000 trusts for 2022-23, when income tax receipts reached 34.6 million. Capital Gains Tax revenue will reach £14.6 billion when summarized for the 2023-24 fiscal year.

The majority of CGT tax money originates from high-value asset sales among less than 1% of taxpayers who recorded capital gains exceeding  £5 million although they make up only a small percentage of all CGT payers. 

Major Changes in the Autumn Budget 2024:

During the Autumn Budget delivered on 30 October 2024, the Chancellor, Rachel Reeves revealed important adjustments to CGT rates.

New rates on Capital Gains Tax in UK from 30 October 2024:

• The basic rate taxpayer CGT rate experienced an increase from 10% to 18%.
• Starting from the Budget Announcement the higher rate of CGT has risen to 24% specifically for higher and additional taxpayers.
• Trustees and personal representatives who dispose of assets face CGT at a rate of 24% instead of 20%
• Rates for residential property continue at 18% and 24% without change.

These modifications took effect right away upon the Budget announcement, and they will apply to all disposals starting from 30 October 2024. 

Changes to Business Relief Rates:

During the Budget announcement, the government introduced progressive modifications to business-related reliefs:

• From April 2025 the rates for the Business Asset Disposal Relief (BADR) and Investor’s Relief will rise to 14% and maintain this rate until April 2026.
• The rates for business-related reliefs will be adjusted twice before they reach 18% starting from April 2026.
• Business Asset Disposal Relief together with Investors’ Relief are subject to limit increases up to 14% starting from April 2025 while the lifetime limit for Investors’ Relief drops to £1 million from October 30th, 2024 onwards.

Annual Exempt Amount for 2024-25

One important change to Capital Gains Tax liabilities comes from substantial annual exempt amount decreases which represent tax-free allowances:

• Reduced from £2,300 to £6,000 from 6 April 2023.
• Further reduced to £3,000 from 6 April 2024.

The reduction will increase CGT liability for many people as it reduces the annual exempt amount by 75% over two years. The decrease of the annual exempt amount from £12,300 to £6,000 starting from April 2024 and to a further £3,000 for the tax years 2024-25 and 2025-26 represents a major increase in CGT tax liability amounting for higher taxpayers who utilized their entire allowances previously. 

Trustees can claim half the individual annual exempt amount which is dropped to £1,500 during the tax years 2024-25 and 2025-26.

Understanding Capital Gains Tax in UK in Detail

The present CGT tax rates apply based on a combination of asset type and taxpayer income tax bracket.

Main Rates of Capital Gains Tax in UK (from  30 October 2024)

• A taxpayer who falls into the basic category will have a CGT rate of 18% when their total income plus gains amounts to below £37,700.
• 24% for higher and additional rate taxpayers.

Residential Property and Carried Interest:

• 18% for basic rate taxpayers.
• 24% of Income Tax applies to individuals in higher income brackets instead of 28% as per current information.
• The taxation of carried interest changed from 32% before it received full taxation as per Income Tax rules.

Business Relief Rates of Capital Gains Tax in UK:

• 10% for Business Asset Disposal Relief (BADR) until 5 April 2025.
• Business Asset Disposal Relief (BADR) rates will hike from 6 April 2025 to reach 14% then climb to 18% on 6 April 2026.

Anti Forestalling Provisions

To stop tax evasion through transaction timing the government created anti-forestalling legislation:

• Special rules determine the taxation when contracts were initiated before 30 October 2024 yet their completion occurred following the same date.
• CGT taxation is normally activated at the moment of making an unconditional contract (not when the asset receives a transfer).
• Anti-forestalling legislation protects the new tax rates from applying to contractual transactions executed after 30 October 2024 even when contracts were finalized before that date.

These rules won’t apply if:

• Both parties may prove contracts were not initiated for tax benefit purposes.
• When parties have connections the contract maintains straightforward commercial intentions.
• Any profits exceeding £100,000 necessitate an official document submission. 

CGT for Different Asset Types

The Capital Gains Tax rules apply to different types of assets whenever their value rises after disposal or sale.

Share and Investment:

• People must pay CGT on stocks and shares that are not part of ISAs or pensions.
• Investment funds: 18% for basic rate taxpayers and 24% for higher rate taxpayers.
• Cryptocurrency: 18% for basic rate taxpayers and 24% for higher rate taxpayers.

Property: 

• Second Homes: The rates for residential property are typically higher than for the other assets.
• Rental Property: The rental properties are subjected to CGT when sold.
• Commercial Properties: Similar to residential properties, commercial properties are also subject to CGT when sold.

Business Assets:

• Business Interest: Selling business interests, such as shares in a company you own can trigger CGT.
• Intellectual Property: It includes patents and trademarks.
• Goodwill: The sale of goodwill, which represents the reputation and customer base of a business, is also subject to CGT.

Valuable Personal Possessions:

• Art, jewelry, and collectibles worth over £6,000.

CGT Planning Strategies

CGT planning has become crucial because tax rates are on the rise while annual exemptions are lower.

1. Use Your Annual Exemption

Each taxpayer receives a £3,000 CGT exemption as a yearly allowance which becomes unusable if not depleted. Each year taxpayers should maximize their capital gains to reach the £3,000 annual exemption value.

2. Transfer Assets to Spouse/Civil Partner

When spouses transfer assets between each other, then the tax authorities recognize no tax implications thus allowing couples to use their respective annual exemption amounts while potentially providing lower tax rates. 

3. Invest in Tax-Efficient Vehicles

Investments containing CGT exemptions could be suitable such as:

• ISA (Individual Savings Account): ISA allows investments to grow free from income tax and CGT.
• Pensions: Contributions to pensions can also reduce your taxable income, which might lower your CGT rate.
• UK government Bonds (Gilts): Gilts are exempt from CGT, making them a safe-haven investment for those seeking to avoid CGT liabilities.

4. Timing of Asset Sales

The disposal timing of assets helps control Capital Gains Tax responsibility especially at tax years closures.

5. Offset Capital Losses

Capital losses from assets enable taxpayers to subtract the value from their capital gains up until the current fiscal year and also allow the losses to roll forward into subsequent years.

Reporting and Paying Capital Gains Tax in UK

Report and payment of Capital Gains Tax in UK depends on two factors: asset category along the amount of gain achieved.

• To report and pay, UK residential property CGT, you must complete your duty within 60 days from signing the deal.
• If you dispose of assets other than property the tax payment follows the rules of Self Assessment tax returns.
• You must submit taxes for Capital Gains Tax and payment by 31 December in the tax year after the sale

Takeaway

Capital Gains Tax regulations within the UK underwent substantial changes after the implementation of the Autumn Budget 2024. Due to increased CGT rates alongside lowered allowances, more taxpayers will become subject to the CGT regulations. 

Effectively designed plans will significantly help you minimize your tax obligations under Capital Gains Tax. Due to the system becoming more complex because of the anti-forestalling provisions and gradual changes in business reliefs people who make significant disposals need professional guidance.

The updated Capital Gains Tax in UK tax system impacts all investors and owners of properties and businesses owners throughout the UK.

The changes in the tax rules need your awareness while individual situations determine the number of potential benefits. When determining appropriate tax advice for your individual needs you should obtain counsel from a professional tax expert who is qualified for the task. 

FAQs

1. What happens if I gift an asset to someone? Will I still have to pay CGT?
   Transfer of assets to a spouse or civil partner qualifies for CGT exemption because such gifts carry no tax benefit or detriment. The recipient of your gifted assets might need to pay Capital Gains Tax when selling the asset at the value that you originally paid.
2. Do I pay CGT if I inherit a property?
   No, you do not pay CGT on inheriting a property. However, if you later sell the property at a profit, you will be liable for CGT on the gain from the date of inheritance to the sale date.
3. How can I avoid paying CGT on my second home?
   To avoid paying CGT on a second home, you might qualify for Private Residence Relief (PRR) if the property was your main residence at some point. This relief can exempt part or all of the gain from CGT, depending on how long you lived there.
4. Can I offset capital losses against capital gains?
   Yes, you can offset capital losses against capital gains. If your losses exceed your gains in a tax year, you can carry forward the excess losses to offset against future gains. This can help reduce your CGT liability in future years.
5. Do I need to report CGT on all asset disposals?
   You only need to report CGT on disposals that result in a gain above your annual exempt amount. However, you must report all disposals of UK residential property within 60 days of completion, regardless of whether a gain is made. For other assets, report gains through your Self-assessment tax return by December 31 following the end of the tax year.

Source / Ref.: Gov.uk  Contains public sector information licensed under Open Government Licence v3.0.

Written by [Ketan Borada / British Portal Team] – Founder of British Portal, dedicated to providing accurate and up-to-date information on UK public services and benefits.